United Kingdom Monetary Policy

United Kingdom: BoE keeps the Bank Rate on hold in May

May 20, 2015

At its 7–8 May meeting, the Monetary Policy Committee (MPC) of the Bank of England (BoE) decided to keep the Bank Rate stable at 0.50% and to leave the stock of asset purchasing at GBP 375 billion, as the markets had expected. The MPC made both decisions unanimously. The BoE continues to see the rate as appropriate considering the inflation outlook as well as the current state of the economy.

In terms of domestic activity data, the Committee commented that the composite Markit/CIPS index moderated somewhat in April, mainly due to deteriorations in the manufacturing and construction sectors, which outweighed an increase in the services component of the index. Conversely, in the same month, an improvement was recorded in consumer confidence, which reached the highest level since 2002. In presenting its May Inflation Report, the Bank added that, looking forward, “the projection is for solid demand growth. The boost to household spending from lower energy and food prices is sustained by a pickup in wage growth.”

In April, consumer prices fell 0.1% over the same month of last year, thus marking the first annual decrease in consumer prices since 1960. As a result, inflation remains well below the Bank’s target of 2.0%. Looking forward, the MPC acknowledged that, “the path for inflation depends on the outlook for domestic cost pressures.” A tighter labor market as well as an increase in productivity should lead to upward inflationary pressure. In addition to that, inflation will remain sensitive to further movements in the volatile prices of energy and commodities, as well as to the evolution of the exchange rate.

FocusEconomics Consensus Forecast panelists expect the Bank Rate to end the year at 1.09%. For 2016, the panel expects the Bank Rate to end the year at 1.66%.

Author:Dirina Mançellari, Senior Economist

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According to monthly GDP data released by the Office for National Statistics (ONS), economic activity rose 0.1% in October over the prior month in seasonally-adjusted terms, up from September’s flat reading.

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